As part of an extensive recodification of private law, Act No. 89/2012 Coll., the Civil Code, introduced a number of new or reintroduced legal institutions. These include the regulation of trust and endowment funds, as well as rules concerning the administration of third-party property. To simplify, this is a relationship in which the founder (the person setting aside the property) transfers part of their ownership to an administrator, who is obliged to manage this property according to predetermined conditions for the benefit of a designated person – the beneficiary.
The law distinguishes between simple and full administration of foreign property. This article will focus on the basic rights and obligations of the administrator of such separated property in accordance with the applicable law.
In general, the administrator may be a natural or legal person,[1] but in relation to trust funds, an exception is provided for in accordance with Section 1453 of the Civil Code. [2] The relationship between the general legal regulation within the meaning of Section 1400 et seq. of the Civil Code and the legal regulation of trust funds is also a widely discussed issue. In this context, it is necessary to emphasize that, despite the fact that these are different institutions, the general legal regulation of the administration of foreign property will be applied with reference to Section 1456 of the Civil Code even in the performance of the activities of a trust administrator. [3]
In order to correctly define the institution of administration of third-party property, it is essential to establish its boundaries. While the draft Czech legislation is based on a broad interpretation of the concept of administration of third-party property, the Czech concept is narrower in this respect. One of the main features is a certain degree of autonomy of the administrator in the performance of his activities. Therefore, administration pursuant to Section 1400 et seq. of the Civil Code cannot be considered, for example, mere detention of property or authorization to perform specific legal acts. The quality of administration is thus a decisive factor that serves as a distinguishing criterion for determining whether it is property administration.
Rights and obligations of the property administrator
In performing their activities, administrators have certain rights and obligations, which primarily depend on whether the administration is simple or full. Regardless of the type of administration, the administrator is obliged to perform the administration personally. If the administrator is a legal entity, its statutory body will usually act on its behalf, unless otherwise agreed. The administrator may also be represented by another person for individual transactions, in which case, however, the administrator is responsible for the careful selection of that person and for providing sufficient instructions. [4]
Furthermore, the administrator is entitled to remuneration for the performance of his activities. However, this is not a condition for the performance of this function, and the administrator's remuneration is based on a rebuttable presumption of remuneration. Unless the parties agree otherwise, the administrator is entitled to the usual remuneration for his activities. The usualness of the remuneration is also assessed on the basis of the administrator's professional experience. [5] When concluding a management agreement, it is possible to set the administrator's remuneration at any amount, or it is possible to conclude an agreement on the free performance of the administrator's activities and stipulate that the trustee is not entitled to remuneration. The administrator's remuneration will usually be paid from the profits of the managed assets, unless otherwise agreed by the parties. [6]
Administrators are also entitled to reimbursement of costs associated with the administration of assets. [7] These are purposefully incurred costs such as bank fees, etc. The reimbursement of costs may be regulated in more detail in the management agreement. Unless the contracting parties agree otherwise, the costs will be reimbursed proportionally from the profits,[8] and if no profit is generated, the costs should be borne by the managed property. [9] The right to reimbursement of costs is directly related to the obligation to distribute profits among the beneficiaries. In the case of both profit and cost distribution, the following formula applies: first (i) according to the agreement of the parties, if this does not exist, then (ii) as fairly as possible, taking into account the nature and subject matter of the administration and the circumstances of its creation, with regard to general customs, and finally, if it is not possible to determine the ratio otherwise, (iii) equally among the beneficiaries.
The specific rights and obligations of the administrator also depend on whether the administration is simple or full. While the purpose of simple administration is to preserve the administered property,[10] full administration of property serves to actively increase it.[11] In the context of simple administration, the administrator is obliged to act in such a way as to exercise all rights in the administration and at the same time to manage the property properly. This also follows from the duty of care of a prudent manager within the meaning of Section 1411 of the Civil Code. A different or modified standard applies to the management of funds. In this context, the administrator is obliged to spend them prudently. Prudent spending is understood to mean rather defensive and reasonable conduct on the part of the administrator.
Within the framework of simple administration, the administrator is entitled to dispose of the administered property if (i) it is in the interest of preserving the value, substance, or purpose of the property, or (ii) if it is necessary to pay debts associated with this property. [12] Both actions require the consent of the beneficiary/beneficiaries[13] and it is also necessary that the disposal corresponds to the relevant consideration.[14] In contrast to the above, under full administration, the administrator is entitled to do almost anything, including disposal.[15] The limit for such action is then expressed in the essence of full administration.
In the exercise of administration, the administrator is obliged to act impartially. The provisions of Section 1412 of the Civil Code set out somewhat different requirements for equal treatment than Section 1403 of the Civil Code.[16] The possibility of different treatment can then only be considered in cases where this intention already resulted from the legal title establishing the administration. The legal regulation also takes into account the possible conflict of interests between the administrator and the beneficiaries. If the administrator is interested in carrying out business activities or other activities that would generate financial gain and could lead to a conflict of interest, or if the administrator is entitled to exercise a right against the beneficiary or the administered property, the administrator is obliged to notify the beneficiary of this fact, [17] without undue delay and, if required by law, in the required (written) form. This corresponds to the obligation of the beneficiary's consent in the event that the administrator is to become a contracting party in relation to the administered property, acquire a right to this property, or acquire a right vis-à-vis the beneficiary. [18]
It also applies that the administrator may use the administered property for his own benefit only with the consent of the beneficiary; the same applies to information acquired during the administration of the property. [19] However, both issues can be resolved in advance in the legal title on the basis of which the administration arose.
The administration of third-party property is logically linked to the issue of its mixing with the administrator's property, which is inextricably linked to the obligation to keep records of the administered property. [20] The administrator is obliged to ensure that there is no mixing, or rather that it is possible to distinguish his property from the property being administered, as well as from other property under his administration. [21] In order to fulfill this obligation, the administrator is required to keep reliable records of the administered property. As a rule, this will involve keeping accounts in conjunction with other information that cannot be gleaned from the accounting records.
Conclusion
In the performance of their activities, administrators of third-party assets have a number of rights, but also obligations related to the assets they administer. A key right of the administrator and an important aspect of their activities is their remuneration, which is not, however, a mandatory requirement of a third-party asset management agreement. The basic obligations include the duty of care of a prudent manager, which is linked to the manager's responsibility for the proper performance of his activities and his due care. The legal regulation leaves a relatively wide margin of discretion, which at the same time emphasizes the need to address all possible circumstances already in the draft of the asset management contract.
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Mgr. Bc. Ondřej Grygar
Attorney
